Order Book, Level I and II Market Data

About Order Book, Level I and II Market Data

The most reliable tool that traders use to make trading decisions is Level I and Level II market data.

Market data comes directly from the exchange - for example, the NYSE and the CME provide Level I and II data for stocks and futures contracts. Traders receive market data via their broker. Level I and Level II are available for futures and equities.

Access to Level II data is more expensive than Level I for stocks and futures. Some brokers may provide all data streams free of charge, but usually charge higher fees as compensation.

This market data includes information on current prices and recently completed trades. Level II data provides more information than Level I. Depending on the broker, Level I and Level II may have different costs associated with them.

Level l Market Data​

Level I is the basic market data needed to trade and most chart based trading systems have it. If you trade using a Price Action or indicator based strategy.
The data Level I includes the following information:


Bid Price - the highest reported price at which someone is willing to buy an asset.
Bid Size - the number of shares, forex lots or contracts that people are trying to buy at the bid price.
Ask Price - The lowest reported price at which someone is willing to sell an asset. Also called the Ask Price.
Ask Size - The number of shares, forex lots or contracts sold at the Ask Price.
Last Price - the price at which the last transaction took place.
Last Size - number of shares, forex lots or contracts involved in the last transaction.

Level II Market Data​

Level II provides more information than Level I data. Basically, it does not simply show the highest bid and offer, but also shows bids and offers for other prices.


Highest Bid Prices - highest bid prices
Bid Sizes - the number of shares or contracts that people try to buy at each bid price.
Lowest Ask Prices - the lowest bid prices from five to fifteen of the lowest prices at which traders are willing to sell an asset and have placed an order to do so.
Ask Size - the number of shares or contracts available at each ask price.

Level II market data provides the additional information needed to trade based on changes that occur in bids and offers.
Traders analyse which side is more active or more liquid to predict the short-term direction of the market price.

If the majority of transactions take place at the bid price, this means that the price may fall in the short term, whereas if the majority of transactions take place at the offer price, the price may rise.

Level II or Order Book - shows all orders that have been placed and are awaiting execution. An order is executed when someone else wants to trade with someone else at the same price.
Level II is also known as Depth of Market (DOM) because it shows the number of contracts available for each of the buy and sell prices.

author:: Mikhail Lemah 2023

 

L2 data are not necessarily accurate.

In my experience, unless you pay big dollars for your data, there are often things missing from the DOM.

I ran a test comparing professional and retail data sources, and they were not the same. Some orders were missing from the retail broker’s L2 data.

Really pissed me off too. I called the broker and told them I had proof that their L2 data were inaccurate—and that I was making trading decisions on their sus data. Put a fire under them… and they started dancing around the issue.

Cheap retail data. *sigh* you get what you pay for.

Thanks, Keith :^)
Non-professional - not licensed - opinion only

 

Then we have level 3 which displays the queu at each price up to 10 orders.

Let’s say the bid size @ 99 is 200
Level 3 will display 60, 40, 20, 10, 50, 10, 10

…

Actually I’ve found #Bid and #Ask to be more meaningful and easier to read than sizes.

…

Otherwise some DOMs can display recent market orders at each price. Split the bids from the asks and aggregate them for each tick.

Some prefer to see what’s actually been printed.
It’s tough to keep with liquidity pulling / stacking.

…

But it’s always interesting to see how a big order is actually consumed. How fast and / or how deep the flush is happening can tell about the path of least resistance (Livermore).

Usually if his orders were absorbed without a blip of slippage then he’d get out because someone was obviously accumulating large amount against his position.

…

Sorry off topic but I believe it’s also in Reminiscences …

One manager got a tip from a guy to buy XYZ stock. He said Okay let’s sell some ! The tipper didn’t understand. He said BUY. The manager was testing the water to see if someone was indeed accumulating a large position in XYZ.

In fact his orders were easily digested by the market. The manager got his confirmation from the market that the tipper was onto something.

Therefore he reversed his position and bought some more.

…

I remembre 2 or 3 months ago in the ES.
That was a down day and we had a huge offer that kept refreshing. The market wasn’t able to fill the order. A few minutes / hours later the market was down 50 points. What a risk reward !

 

I've found L2 data to be rather useless. In theory it's great; in reality, it's a lot of B$; not much truth there--unless you're in a cage playing in nanos or micros.

• There's so many ways to hide liquidity. VWAP, iceberg orders, etc..
• Rarely will big players dump their entire order onto the books at once... unless they're spoofing XD... and then the liquidity dries up the moment the market price gets too close.
• When I was a beginner I trusted L2 data and got burned a few times until I figured the game out.
• Also by putting liquidity on the books you give the brokers the ability to maximize commissions. They move the price around to execute orders and soak up commissions and fees. Personally I don't like to show my hand.
• I wrote algos to monitor prices--all on local metal--and fire orders off when my conditions were matched. My execution time was in the toilet... so it didn't work very well. I always got the worst fills.
• They did have an option to run algos on broker rigs, but there were minimums and fees..

Bad data are worse than no data at all.

Thanks, Keith :^)
non-professional - not licensed - opinion only

 

Yes the quality of the data really depends on the quality of the data provider. That's why they make you agree to their disclaimer that they are not responsible for any losses that you suffer as a result of their data and you basically use their data at your own risk like they are operating fair grounds rides. LOL

 

I found time and sales data to be much more reliable than L2. The big boys played games with L2 in that bids and asks would disappear as price got close.

 

Paul Rotter aka The flipper used to spoof the market heavily in the Eurex (Bund) and made a bunch of millions this way by exploiting his old school buddies. He was hated by all of his peers that used to trust the level 2 a bit too much.

An article

 

Yes except one has to be careful with T&S as well. Some orders do not have to be reported to the T&S until after-the-fact so T&S is not 100% complete either. The problem is due to the informational nature of these order information, it gives people the incentive to manipulate and hide their trading activities and that unfortunately affects the quality of the data a bit sometimes.